United States: Fed cuts interest rates

The US Federal Reserve has cut interest rates by 50 basis points, signaling the central bank’s confidence that its war against inflation is coming to an end. How far and how fast the Fed cuts rates moving forward remains to be seen.

Fed Chair Jerome Powell told lawmakers earlier this year that the era of near-zero interest rates is likely over, the central bank projected in June that the median interest rate would drop to 4.1% in 2025 and 3.1%in 2026.

The Fed further lowered its median rate forecast Wednesday to 3.4% next year and 2.9% in 2026, as well as in the long run, according to new economic projections.

“This would only be the first cut of a rate-cutting cycle. The size and frequency of future cuts will give us a better understanding of whether the Fed believes they are behind, or ahead of, ‘the curve,’” said Jonathan Ernest, an economics professor at Case Western Reserve University.

The jobless rate ticked up to 4.3% in July and clocked at 4.2% last month. That’s relatively low by historical standards but still a sign of labor market “cooling” the Fed had been watching for as it waited to cut rates.

While some economists believe the Fed could have started cutting rates in July, the next few months are critical as the central bank attempts to bring the economy in for a “soft landing,” maintaining its dual mandate of low inflation and maximum employment as it brings down rates.

 

Pakistan: Current Account turns negative

Pakistan’s current account (CA) posted the first deficit in four months in May 2024, of US$270 million against a surplus of US$499 million a month ago.

CA deficit during 11MFY24 grew to US$464 million against a deficit of US$3.8 billion in the corresponding period last year.

A large primary income deficit of US$1.4 billion was the key reason behind the negative figure, without which CA balance would have been comfortably positive, despite a wider good trade deficit.

The primary deficit ballooned to US$1.4 billion (highest ever level) due to US$1.5 billion worth of payments. These payments included interest on foreign debt and backlog of dividends of multinational companies. As per the central bank, the latter has been nearly completely settled; hence the primary income deficit should moderate to around US$500 million in the coming months.

Goods trade deficit was reported at US$2.0 billion in May, higher than US$1.8 billion in April and doubling YoY. 

Imports of US$5.0 billion were at the highest level in FY24 to date, up 13%MoM and 35%YoY.

The sequential growth in imports was led by seasonally higher petroleum imports (up 8%MoM) and 12% higher machinery imports. Iron & Steel imports (scrap and other raw materials) rose 40%YoY.

This is also seasonal and does not point to a sustainable rebound in construction activity (down 3%YoY in 11MFY24). 

Exports were up a healthy 17%YoY, mainly driven by exports of textiles (up 18%YoY, seasonal) and food (up 55%YoY. Rice exports doubled YoY).

Remittances in May were an impressive US$3.2 billion, up 15%MoM and 54%YoY, ahead of the Eid-ul-Adha holidays, likely to normalize to around US$2.5 billion in the coming months, in our view.

SBP’s Forex reserves were reported at US$9.1 billion

SBP’s Forex reserves remained flat around US$9.1 billion by mid-June 2024, equivalent to just about two months’ imports.

The SBP began cutting interest rates in June, by 150bps, taking the policy rate to 20.5%.

Many industries (cement, autos, steel) are operating at very low utilization levels (50-60%); any likely increase in imports could increase trade deficit.

Tough budgetary measures for the real estate and textile industries may extend the spell of weak demand a few more months (keeping the growth in imports moderate).

CAD crossing US$500 million is a key risk and can have negative implications for the exchange rate, inflation and monetary policy,.

 

Gold price on the rise

Gold prices held steady on Tuesday as the dollar eased, while investors looked forward to key US inflation data that could offer clues on how soon the Federal Reserve can cut interest rates.

Spot gold price was flat at US$2,350.85 per ounce by 0350 GMT, after rising about 1% in the previous session. US gold futures rose 0.8% to US$2,352.00.

"A very strong dollar picture supported by a change in the US monetary policy stance where the Fed starts looking for evidence to kick start interest rate hikes instead of easing could be a major risk as we could see a further corrective move in spot gold," said Kelvin Wong, a senior market analyst for Asia Pacific at OANDA.

However, in the short term, spot gold is still more skewed towards the positive side rather than the negative side and US$2,310 is a key short-term support for this week, Wong added.

The core personal consumption expenditures price index (PCE), the Fed's preferred inflation measure, is due on Friday.

Fed meeting minutes released last week showed that the policy response, for now, would involve maintaining the benchmark policy rate at its current level but also reflected discussions of possible further hikes.

Traders' bets indicated rising skepticism that the US central bank will lower rates more than once in 2024, currently pricing in about a 62% chance of a rate cut by November according to the CME FedWatch Tool.

Bullion is known as an inflation hedge, but higher rates increase the opportunity cost of holding non-yielding gold.

Vietnam's central bank will stop auctioning gold in the domestic market and launch a new measure to stabilize domestic prices, it said on Monday.

 

Pakistan cautious ahead of key IMF talks

The State Bank of Pakistan (SBP) maintained the policy rate at 22%, on April 29, 2023. Market expectations were divided between no-change and a cut.

CPI had decelerated to 20% in March from a recent peak of 38% (May 2023), and the CA balance in March was a surplus of US$619 million, with 9MFY24 current account deficit of only US$0.5 billion – both, along with ongoing fiscal contraction, supported a rate cut.

However, the SBP overweighed the risks to inflation emanating from – a volatile geopolitical backdrop due to tensions in the Middle East and its impact on global oil prices, other global commodity prices likely to have bottomed out, and perhaps more importantly, the terms of the next IMF program.

Despite the tight monetary conditions, the SBP’s outlook for GDP growth for FY24 of 2-3% remains intact, supported by a robust agricultural sector. Most major crops (rice and maize) are projected to exceed the targets for the year. LSM growth in 8MFY24 was negative 0.5% as against negative4% last year, but it is expected to perform better in the remaining months.

Core inflation continued to decline in March – to 15.7% from 18.1% in February 2024. Encouragingly, the contribution of wage growth to overall CPI has also diminished considerably in recent months. These reinforce the outlook for continued disinflation in the coming months. However, risks to inflation emanate from volatile geopolitics, global commodity prices and the extent to which the next fiscal budget will be inflationary.

External financial inflows in Pakistan have been weak in recent months, as global central banks have adopted a cautious policy stance. The SBP wants to build-up further FX buffers (in the face of above uncertainties) before adopting an accommodative stance.

Outstanding debt repayments until June 2024 are US$1.8 billion (principal only), while Pakistan is likely to receive the final tranche of IMF SBA program, of US$1.1 billion.

Monetary aggregates (M2 growth) is expected to decelerate in the coming months to under inflation (from 17.1% in March), and the SBP expects the government to maintain the primary surplus of around 1.8% of GDP until year-end.

Analysts believe even if inflation and the external account continue to improve in the coming months, the June announcement would be mainly influenced by IMF conditions for a new program – any further adjustments in energy tariffs and the budgetary measures that the Fund will demand.

 

 

PSX benchmark index gains 1.5%WoW

Pakistan Stock Exchange remained range-bound during the week ended on September 08, 2023, with the benchmark index KSE-100 marginally fluctuating in the slim range of 654 points. The fear of interest rate hike due to the increase in the T-Bills yields kept the market activity in check. However, positive developments over SIFC and the caretaker prime minister’s announcement of total expected inflows of US$50 billion from UAE and Saudi expected to materialize in the next 4-5 years added a substantial layer of positivity to this multifaceted narrative.

The KSE-100 index closed at 46,013 points with a gain of 1.55%WoW. Meanwhile, market participation declined by 26%WoW, averaging at 138 million shares. On the currency front, rupee strengthened against the greenback. Moreover, administrative measures yielded positive results, taking the gap between interbank and open market below 1% which was around 5% a week ago.

August trade deficit widened by 29.8%MoM to US$2.126 billion as compared to US$1.637 billion in July.

The foreign exchange reserves held by the State Bank of Pakistan (SBP) by US$70 million to US$7.8 billion as of September 01, 2023.

Other major news impacting the market include: 1) August 2023 petroleum sales declined 8%YoY to 1.41 million tons, 2) August cement dispatches rose by 37%YoY to 4.518 million tons, 3) Pakistan’s public debt surged 22% to PKR61.75 trillion in July and 4) IMF allowed leeway on electric bills, raises gas prices by 50%.

Sector-wise, Close-End Mutual Fund was the worst performer, while Transport, Automobile Parts & Accessories & Inv. banks/ Securities cos. were amongst the top performers.

Flow-wise, major net selling was recorded by Mutual Funds with a net sell of US$2.4 million. Individuals absorbed the selling with a net buy of US$3.6 million.

Top performing scrips were: GADT, DAWH, ILP, THALL, KAPCO, while the Laggards included: JWDS, ARPL, BAHL, EFUG and INDU.

Going forward, market is expected to remain range-bound due to the upcoming Monetary Policy Committee meeting on September 14, 2023.

Furthermore, government’s steps over energy reforms, and next review with the IMF may improve the market sentiments.

Analysts continue to advise investors to remain cautious while taking positions and invest in companies with strong fundamentals or high dividend-yielding scrips.

 

US growth a puzzle for policymakers

US economic growth, still racing at a potentially inflationary pace as other key parts of the world slow, could pose global risks if it forces Federal Reserve officials to raise interest rates higher than currently expected. The longer the US economy outperforms, the more Fed officials wonder if they understand what's happening.

The Fed's aggressive rate increases last year had the potential to stress the global financial system as the US dollar soared, but the impact was muted by largely synchronized central bank rate hikes and other actions taken by monetary authorities to prevent widespread dollar funding problems for companies and offset the impact of weakening currencies.

Now Brazil, Chile and China have begun cutting interest rates, with others expected to follow, actions that international officials and central bankers at last week's Jackson Hole conference said are largely tuned to an expectation the Fed won't raise its rate more than an additional quarter percentage point.

While US inflation has fallen and policymakers largely agree they are nearing the end of rate hikes, economic growth has remained unexpectedly strong, something Fed Chair Jerome Powell noted in remarks on Friday could potentially lead progress on inflation to stall and trigger a central bank response.

That sort of policy shock, at a moment of US economic divergence with the rest of the world, could have significant ripple effects.

"If we get to a point where there is a need for ... doing more than what's already priced in, at some point markets might start getting nervous ... Then you see a big increase in the risk premia in different asset classes including emerging markets, including the rest of the world," said International Monetary Fund chief economist Pierre-Olivier Gourinchas. "The risk of a financial tightening, a very sharp financial tightening, I think we cannot rule that out."

After the pandemic shock and the inflationary rebound that had most countries raising rates together, it's normal now for policies to diverge, Cleveland Fed President Loretta Mester told Reuters on the sidelines of the Jackson Hole conference on Saturday.

"The economy is a global economy, right? It's an interconnected economy," Mester said. "What we do with our policy - if we can get back to 2% in a timely way, in a sustainable way, if we have a strong labor market - that's good for the global economy."

Fed policymakers will deliver a crucial update to their economic outlook at the 19-20 September meeting, when they are expected to leave their policy rate unchanged at 5.25% to 5.5%.

Yet Fed officials remain puzzled, and somewhat concerned, over conflicting signals in the incoming data.

US gross domestic product is still expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%. US GDP expanded at a 2.4% annualized rate in the second quarter, and some estimates put the current quarter's pace at more than twice that.

The contrast with other key global economies is sharp. The euro area grew at an annualized 0.3% in the second quarter, essentially stall speed. Difficulties in China, meanwhile, may drag down global growth the longer they fester.

European Central Bank President Christine Lagarde noted after the Russian invasion of Ukraine last year, the outlook was for a euro-area recession, and a potentially deep one in parts of it.

"We expected all that to be a lot worse. It has turned out to be much more robust, much more resilient," Lagarde said.

U.S. fiscal policy is driving some of the difference with $6 trillion in pandemic-era aid still bolstering consumer spending. A recent investment push from the Biden administration is supporting manufacturing and construction.

China may also play a role, economists say. Its slowdown after a short-lived growth burst earlier this year could pinch Germany's exports and slow Europe's growth, for instance.

But, Citigroup Chief Economist Nathan Sheets said, "When you hear economists give you three or four reasons for something, that's usually because we really don't know."

China cuts medium term lending rates, while US Fed leaves rate unchanged

China's central bank has cut the borrowing cost of its medium-term policy loans for the first time in 10 months on Thursday. This is in line with expectations, as Beijing ramps up stimulus measures to shore up a shaky economic recovery.

The People's Bank of China (PBOC) said it lowered the rate on 237 billion yuan (US$33.1 billion) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.65% from 2.75% previously.

In a Reuters poll of 33 market watchers this week, all respondents had predicted a cut to the MLF rate, with 94% of them expecting a 10-bps cut.

It may be recalled that the US Federal Reserve had left interest rates unchanged on Wednesday but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year, as the US central bank reacted to a stronger than expected economy and a slower decline in inflation.

In a press conference at the end of the central bank's latest policy meeting, Fed Chair Jerome Powell described US growth and the job market as holding up better than expected under the weight of the aggressive monetary policy tightening of the past year - likely lengthening the Fed's fight to lower inflation but also letting it proceed with less economic damage.

Pakistan: Monetary Policy or Mockery

State Bank of Pakistan (SBP) was scheduled to announce Monetary Policy on March 16, 2023. However, on February 28, the central bank announced to hold meeting of Monetary Policy Committee on March 02. The central bank is likely to hike the interest rate by 200 to 300 bps.

While this may have surprised some people, many say it was much anticipated. They say since SBP and Finance Ministry plan to hold a big auction on March 08, 2023. The Banks faced a few challenges, worst being lack of clarity on the interest rate.

It was feared that if the Monetary Policy is not announced before the auction, the banks will participate at much higher than the previous cutoff levels.

If the Banks participate at or around the previous cutoff levels and the SBP raises interest rates higher than the market expectations of 200bps, the carry on the T-bills will be negative as SBP will have to hold OMO at higher levels.

It appears that the Government of Pakistan is adamant at rising interest to curb inflation as per IMF mantra. However, it is necessary to say that after the proposed hike the paying interest rate for the GoP on its borrowing would become unsustainable, inflation would spike to new highs and businesses would witness further erosion in their competitiveness – leading to further fall in exports.

It is also necessary to reiterate that the steps being taken on the behest of IMF would take Pakistan closer to default. One wonders, why the present economic managers have not been able to come up with their homegrown plan to pull Pakistan out of the current malice.

Failure on the part of economic managers to tax the rich, as advised by the chief of IMF, suggests that the rulers wish to prolong their ‘honeymoon’ and let the Pakistanis face all the adversaries.

 

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Corporate financial health to worsen in 2023

Corporate financial health will worsen across the globe this year, failing to gain respite from signs that inflation has peaked and hopes for an economic soft landing, asset manager Janus Henderson said in a report released on Monday.

Its global credit risk monitor's indicators - debt loads, access to capital markets, cash flow and earnings - all flashed red in the fourth quarter of 2022, signalling caution to investors.

The firm, which manages around US$275 billion in assets, expects earnings growth to weaken in 2023, with energy and input costs eroding companies' cash flows.

While companies' financial metrics have been resilient so far, the second half of 2023 is when corporate margins will decline as weaker consumer confidence and higher interest rates bite, the study found.

All companies it tracks across global regions had flat or negative earnings forecast revisions for this year. Earnings are then expected to rebound in 2024, particularly in emerging markets.

Although an economic soft landing looks more likely, the asset manager remains cautious given the retreat in inflation is too late to prevent further deterioration in the credit cycle.

It said economic activity data point to a recession and government bond yield curves moved deeper into inversion territory - often a reliable signal of an upcoming recession - while central banks continue to withdraw liquidity and inflation-adjusted rates spikes translate into high borrowing costs.

More positively, a buoyant market for debt sales signalled strong demand for credit, though that may not last.

The risk premium on euro and US investment-grade corporate bonds has fallen some 19 basis points since the start of the year. The cost of insuring exposure to junk debt has fallen by 86 bps, according to S&P Global Market Intelligence.

"Optimism in a central bank retreat has allowed markets to reopen, but this too may prove fleeting," Jim Cielinski, the firm’s global head of fixed income, said.

"We are not out of the woods yet, although the decline in inflation seen in the last three months is a critical prerequisite to the elusive soft landing that investors cherish."

Gold prices inching towards record highs

Gold prices are expected to rise towards record highs, above US$2,000 an ounce in year 2023, albeit with a little turbulence, as the United States slows the pace of rate hikes and eventually stops increasing them, according to industry analysts, reports Reuters.

Spot prices of the precious metal have shot above US$1,900 an ounce, surging by about 18% since early November 2022 as inflationary pressures recede and markets anticipate less aggressive monetary policy from the US Federal Reserve.

Fast-rising interest rates hammered gold prices last year, plunging as low as US$1,613.60 in September 2022 from a high of US$2,069.89 in March 2022 - just shy of a record peak in 2020.

Higher rates lifted returns on bonds, making non-yielding gold less desirable for financial investors, and pushed the greenback to its strongest in 20 years, making US$-priced gold costlier for many buyers.

The weakening greenback and bond yields will become macro tailwinds for the yellow metal, pushing gold above US$2,000/oz in the coming months, said analysts at Bank of America.

With less pressure from the US$ and bonds, investors are likely to buy bullion as a hedge against inflation and economic turbulence, said WisdomTree analyst Nitesh Shah, adding that prices could easily move above US$2,100 an ounce by year-end.

Gold is traditionally seen as a safe place to store wealth. "The risk of central banks overdoing it and pushing their economies into recession is high," said Shah.

Speculators who in November 2022 were betting gold prices would fall have amassed a net long position in COMEX futures of 8.3 million ounces of gold, worth US$16 billion, helping push up prices.

Analysts expect central banks to continue stockpiling gold after buying more metal in the first nine months of 2022 than in any year in half a century, according to the World Gold Council.

Retail demand for gold bars and coins should also remain strong, boosted by a revival of economic growth in China, the biggest consumer market, said analysts at ANZ.

But gold may have gone too far too fast in the short term and needs to correct lower, analysts said.

"Should prices fall from current levels to the US$1,870 to US$1,900 an ounce range, we expect the (upward) trend to reverse," the bank said, adding that if gold falls below US$1,800, it could slip to US$1,730.

 

Even talk about hike in interest rate causes major decline at US stock exchanges

Over the years, I have been saying that Pakistan suffers from cost pushed inflation and any hike in interest rate erodes competitiveness of Pakistani businesses.

However, the policy planners in Pakistan, living in utopia have been persistently increasing interest rate having the least realization. I am sure this news will help the policy makers in understanding my point of view.

In the United States, stocks closed sharply down on Friday following comments from Federal Reserve Chairman Jerome Powell that the Fed will press forward with raising interest rates amid lingering inflation.

Higher interest rates can restrain economic growth by making borrowing money more expensive and slowing consumer spending. 

The Dow Jones Industrial Average dropped more than 1,000 points, while the Nasdaq composite dropped almost 500 points. The S&P 500 dropped by more than 140 points.

All three declines meant a more than 3% drop. All are still slightly above their levels a month ago, but much of their gains in that time were erased on Friday.

Powell gave a keynote address at the Fed’s annual policy summit in Jackson Hole, Wyo., saying that the central bank would be willing to take forceful and rapid steps to address inflation, even if it means potentially higher unemployment rates and a recession. 

The Bureau of Economic Analysis revealed on Friday that inflation slowed to 6.3% in July from exactly a year ago. This figure is down from the 6.8% annual inflation rate that was reported in June. 

But the Fed’s goal is to get inflation down to 2%, and Powell said the drop from last month is far short of what the Fed needs to see before it can be confident that inflation is dropping. 

The Fed has already raised interest rates from a range of 0 to 0.25% in March to 2.25% to 2.5% in July. This included two consecutive increases of 0.75 percentage points, the largest monthly increases in almost 30 years.

Powell said the Fed’s decision on how much to raise interest rates next month will be based on the data it receives.

 

US Fed minutes hint more rate hikes but at slower pace

US Federal Reserve officials saw little evidence late last month that US inflation pressures were easing and steeled themselves to force the economy to slow down to control an ongoing surge in prices, according to the minutes of their July 26-27 policy meeting.

While not explicitly hinting at a particular pace of coming rate increases, beginning with the September 20-21 meeting, the minutes released on Wednesday showed US central bank policymakers committed to raising rates as high as necessary to tame inflation - even as they began to acknowledge more explicitly the risk they might go too far and curb economic activity too much.

"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said.

Though some reduction in inflation, which has been running at four-decade highs, might occur through improving global supply chains or drops in the prices of fuel and other commodities, much of the heavy lifting would have to come by imposing such high borrowing costs on businesses and households that they would spend less, the minutes stated.

"Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures," the minutes said.

Yet despite that arch tone on inflation as their top concern, the minutes also flagged what will be an important dimension of the Fed's debate in coming months - when to slow down the pace of rate increases, and how to know if rate hikes have gone past the point needed to beat rising prices.

While judged as generally dovish by traders who increased their bets the Fed would approve just a half-percentage-point hike at the September meeting, Bob Miller, Head of Americas Fundamental Fixed Income at BlackRock, said the minutes seemed to be giving the Fed more scope to react as data flowed in.

"The intended message was much more nuanced and reflected a need to optionality by a central bank trying to assess conflicting economic data and shocks”, he said. "Staking out some conditionality going forward seems sensible given the unprecedented nature of this particular cycle."

The pace of rate increases indeed could ease as soon as next month, with the minutes stating that, given the need for time to evaluate how tighter policy is affecting the economy, it would become appropriate at some point to move from the large, 75-basis-point increases approved at the Fed's June and July meetings, to half-percentage-point and eventually quarter-percentage-point hikes.

Some participants said they felt rates would have to reach a sufficiently restrictive level and remain there for some time in order to control inflation that was proving far more persistent than anticipated.

Many, on the other hand, noted the risk that the Fed could tighten the stance of policy by more than necessary to restore price stability, particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to the rate increases already telegraphed by the Fed, participants generally judged that the bulk of the effects on real activity had yet to be felt, the minutes stated.

As of the July meeting, Fed officials noted that while some parts of the economy, notably housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.

The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.

For the Fed to scale back its rate hikes, inflation reports due to be released before the next meeting would likely need to confirm that the pace of price increases was declining. Inflation by the Fed's preferred measure is more than three times the central bank's 2% target.

Data since the Fed's July policy meeting showed annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that would argue for the smaller 50-basis-point rate increase next month.

But other data released on Wednesday showed why that remains an open question.

Core US retail sales, which correspond most closely with the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock-value headline that inflation had passed the 10% mark in the United Kingdom, seemed to prompt investors in futures tied to the Fed's target policy interest rate to shift bets in favor of a 75-basis-point rate hike next month.

Meanwhile, a Chicago Fed index of credit, leverage and risk metrics shows continued easing. That poses a dilemma for policymakers who feel that tighter financial conditions are needed to curb inflation.

Job and wage growth in July exceeded expectations, and a recent stock market rally may show an economy still too hot for the Fed's comfort.

 

 

Further hike in interest rate by the central bank could prove suicidal for Pakistan

State Bank of Pakistan (SBP) is scheduled to announce a key monetary policy decision on May 23, 2022. The analysts and market participants keenly await SBP policy direction given Pakistan's economic uncertainty.

The consensus is growing in Pakistan that further hike in interest could prove suicidal for the country. The debt servicing by the Government of Pakistan (GoP) has become unsustainable. On top of that any hike in cost of doing business will dampen prospects of boosting exports. Let everyone remember that Pakistan suffers from cost-pushed inflation.

Since the last Monetary Policy announcement on April 07, 2022, secondary market rates including T-Bill/Kibor rates have gone up by around 200bps due to uncertainty about continuation of IMF program and removal of subsidies on petrol and diesel. 

It will also be interesting to see SBP’s stance as this will be the first monetary policy statement after the recent change in the government and appointment of Dr. Murtaza Syed as acting Governor of the central bank.

The most recent T-Bill auction tell a different story, the cut off yields declined for the first time after almost a year, down by 5nbs to 29bps with 3/6/12 months T-Bill yields clocking in at 14.49%, 14.70%, and 14.75% respectively.

For further clues let us go through some details of a survey conducted by Pakistan’s leading brokerage house, Topline Securities. Questions were asked on interest rate, inflation, currency, GDP growth and current account deficit outlook.

As per the survey results, around 54% of the participants expects an increase of 100bps, 14% of the participants anticipate an increase of 150bps and 11% expect an increase of 200bps or more. As against this 13% participants expect increase of 50bps and 9% expect no change.

Participants remained divided on policy rate expectations by end of FY23. 27% of the participants expect policy rate to close at 13% by end of next financial year. 41% of the participants expect it to above 13% while 32% anticipate it to be below 13%.

In terms of currency outlook, 39% of the participants expect PKR/USD to close above 205 by the end of next financial year. 9% believe it will remain in the range of 200-205 by FY23 end. 23% expect it to close in between 195 to 200 while the remaining anticipates it to be below Rs195.

27% of the participants are expecting inflation of 13-14% in FY23, 16% expect it to be between 14 to 15 percent, 4% anticipate it to be above 15%. The remainder of the respondents is eyeing an inflation of lower than 13% in FY23.

In terms of GDP growth, 7% of the participants think that GDP growth will be below 3% and 32% of them expects it to be between 3-3.5%, whereas 23% of the participants project it to be 3.5%-4.0%. The remainder of them anticipates it to be above 4%. 

Participants remained divided on the expectations of current account deficit forecast for FY23 as 46% participants expect current account deficit to be in the range of US$12 billion to US$15 billion while 18% participants anticipate it to above US$15 billion. The remainder of them expects it to be below US$12 billion.  

Pakistan is currently facing tough economic times as depleting foreign exchange reserves, rising fiscal deficit amid huge petrol/diesel subsidy and indecisiveness by the new government on key economic measures is exacerbating economic issues.

It will key for government to take the required reform steps including removal of subsidy on petrol/diesel, measures to curb imports and improve tax collection. This will pave way for the resumption of IMF program which currently remain stalled and will result in dollar flows that could ease pressure on currency and foreign exchange reserves going forward.

Given concerns highlighted above along with rising inflation and weakening currency, analysts anticipate SBP to raise the policy rate by 100bps.

 

Can emerging markets cope with the shift in US Fed policy?

For most of last year, investors priced in a temporary rise in inflation in the United States given the unsteady economic recovery and a slow unraveling of supply bottlenecks. Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labor market has started to feed into wage increases.

According to a report by International Monetary Fund (IMF), the new Omicron variant has raised additional concerns of supply-side pressures on inflation. The US Fed referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.

Inflation is likely to moderate later in year 2022 as supply disruptions ease and fiscal contraction weighs on demand. The Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook.

The history shows that the effects on emerging markets benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery. Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs.

Spillovers to emerging markets could also be less benign. Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.

These developments could come with a slowing of US demand and trade, which may lead to capital outflows and currency depreciation in emerging markets.

The impact of Fed tightening in a scenario like that could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the USD.

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October 2021 releases of the World Economic Outlook and Global Financial Stability Report.

Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation. In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities.

Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively.

In either case, responses should include letting currencies depreciate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with sufficient reserves can intervene provided this intervention does not substitute for warranted macroeconomic adjustment.

Nevertheless, such actions can pose difficult choices for emerging markets as they trade off supporting a weak domestic economy with safeguarding price and external stability. Similarly, extending support to businesses beyond existing measures may increase credit risks and weaken the longer-term health of financial institutions by delaying the recognition of losses. And rolling back those measures could further tighten financial conditions, weakening the recovery.

To manage these tradeoffs, emerging markets can take steps to strengthen policy frameworks and reduce vulnerabilities. For central banks tightening to contain inflation pressures, clear and consistent communication of policy plans can enhance the public’s understanding of the need to pursue price stability.

Countries with high levels of debt denominated in foreign currencies should look to reduce those mismatches and hedge their exposures where feasible. And to reduce rollover risks, the maturity of obligations should be extended even if it increases costs. Heavily indebted countries may also need to start fiscal adjustment sooner and faster.

Continued financial policy support for businesses should be reviewed, and plans to normalize such support should be calibrated carefully to the outlook and to preserve financial stability. For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.

Beyond these immediate measures, fiscal policy can help build resilience to shocks. Setting a credible commitment to a medium-term fiscal strategy would help boost investor confidence and regain room for fiscal support in a downturn. Such a strategy could include announcing a comprehensive plan to gradually increase tax revenues, improve spending efficiency, or implement structural fiscal reforms such as pension and subsidy overhauls (as described in the IMF’s October Fiscal Monitor.

Finally, despite the expected economic recovery, some countries may need to rely on the global financial safety net. That may include using swap lines, regional financing arrangements, and multilateral resources. The IMF has contributed with last year’s US$650 billion allocation of Special Drawing Rights, the most ever.

While such resources boost buffers against potential economic downturns, past episodes have shown that some countries may need additional financial breathing room. That’s why the IMF has adapted its financial lending toolkit for member nations.

Countries with strong policies can tap precautionary credit lines to help prevent crises. Others can access lending tailored to their income level, though programs must be anchored by sustainable policies that restore economic stability and foster sustainable growth.

While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.

Will BoE and US Fed be on the same page?

The US Federal Reserve has made it official that starting later this month, it will reduce their monthly bond purchases by US$15 billion ($10 billion Treasuries, $5 billion mortgage backed securities). By June 2022, the bond buying program should come to an end. 

The Fed explains that pandemic stimulus can start to be unwound as “substantial further progress in the economy has (been) made toward the Committee’s goals since December 2021.” They left interest rates unchanged, which was expected and continued to use the word “transitory” to describe inflation.  

While some investors believed they would drop this language, it did not seem to matter as once the dust settled, USD ended the day virtually unchanged (slightly lower) from its pre-FOMC levels against other the major currencies. Stocks and bond yields ended higher which should benefit JPY crosses.

Looking ahead to Friday’s non-farm payrolls (NFP) report, economists expect a significant recovery in job growth during the month of October.  A large part of this has to do with the slowdown in September, when non-farm payrolls rose by only 194,000. That number is expected to more than double this week with a consensus forecast of 450,000. 

According to ADP, private sector payroll growth was very strong last month but even though service sector activity hit a record high in October, the shortage of workers drove the employment index lower. As one of the most important leading indicators for non-farm payrolls, this suggests that while more jobs are expected in October, the increase may fall short of the market’s lofty forecast. 

Will BoE hike rate today?

While the countdown to Friday’s NFP report has started, analysts have shifted focus to the monetary policy announcement by the Bank of England (BoE) on Thursday. In many ways, the BoE rate decision should have a greater impact on GBP than FOMC did on the USD because the UK central bank is close to raising interest rates.

As the second major central bank to reduce asset purchases, the BoE has been leading the pack in unwinding pandemic support and with inflation surging, a small contingent of investors believe they could hike as quickly as Thursday. The market is pricing in a 60% chance of 15bp hike which means a full quarter point move is unlikely. However the central bank has done a smaller adjustment before so we can’t rule out that possibility completely.

BoE Governor Bailey and monetary policy committee member Saunders have suggested that an immediate hike may be needed but other policymakers want to see further improvements in labor market activity or evidence that inflation is less transitory before making the move.

With the Reserve Bank of New Zealand raising rates, Bank of Canada announcing ending to Quantitative Easing and the Fed beginning to reduce asset purchases, there is a decent chance for a rate hike by the BoE. It may not be a full quarter point, but it could be 15bp increase. 

The immediate tightening should be wildly positive for the greenback as it is not really anticipated. However, if they forgo a rate hike in November, then a hike in December becomes very likely.

In this scenario, analysts expect no change to be accompanied by hawkish comments which could be initially negative but ultimately positive for GBP. Either way, barring an unexpected surprise analysts see GBP strengthening post BoE announcement, particularly against EUR. 

Pakistan stock market witnesses 6% decline in daily traded volume

The benchmark index of Pakistan Stock Exchange continued to experience volatility during the week on account of reported action by SECP against in‐house financing and uncertainty with regards to Panama‐gate case. Though market fell initially to one‐month low on first day of the week, it recovered thereafter closing at 49,624 points (+1.26%WoW) on rumors of a new leveraged product and SECP clarification on measures/regulatory oversight over brokerage firms. Average daily traded volumes fell by 6%WoW to 322 million shares where volume rankings were occupied by: LOTCHEM, ASL, KEL, ANL and TRG. Leaders during the outgoing week included: LOTCHEM, EPCL, AGTL, SNGP and ICI while laggards included: NCL, HMB, PIOC, DAWH and PPL. Key developments during the week included: 1) Pak Suzuki Motor Company (PSMC) sent an investment plan of US$660 million to the government, requesting same benefits/incentives for 2 years from the start of mass production of new models instead of 5 years granted to new entrants in the Auto Policy 2016‐21, 2) MUGHAL announced to set up 6 additional lines of 3.1MW gas CPP taking total CPP capacity to 27.9MW and spend Rs1.00 billion on these lines and BMR of existing re‐rolling mill, 3) SBP issued Rs387.4 billion worth of T‐Bills against the participation of Rs473 billion, 4) SNGP’s BoD approved a capital intensive project for development of 1,200mmcfd LNG pipeline from Karachi to Lahore at an estimated cost of Rs111 billion with expected COD of October 2018, and 5) CPI inflation hit a 3‐month high of 4.2%YoY in February  2017. The market is likely to remain volatile in the upcoming week due to lingering regulatory and political risks. Inflationary pressures on account of rising food and fuel prices are expected to strengthen hawkish monetary policy stance. In this backdrop, banks are expected to perform well.

Continuing to climb albeit at a slower pace than the tail end of CY16 bullish sentiment prevailed in global commodities market during February 2017. This sentiments were driven by hike in prices of commodities actively traded that included oil, Cotton, Steel and food commodity prices. Whereas, commodities witnessing decline in prices were Coal and Urea on the back of policies and capacities raising global production. Going forward factors driving commodity prices are: 1) divergence in global monetary policy, where any tightening in US rates could strengthen the greenback, softening commodity prices, 2) global economic activity picking up pace as global manufacturing PMI remain expansionary and 3) continued tightening of supply dynamics for energy prices expected to keep supply constrained. Lastly, political factors including expansionary fiscal policies by the US government and China's meeting of the Politburo Standing Committee are expected to renew commitments to infrastructure development, providing support to metals, energy and hard commodity prices.

After a fitting end to CY16 (promising rabi season), CY17 got off to a sluggish start with not only urea but cumulative fertilizer sales remaining depressed during January 2017 primarily in response to low crop prices (depressed agricultural commodity cycle) and crop shortfalls lowering farmer's income. According to latest figures released by NFDC, cumulative fertilizer offtake during the aforementioned month was recorded at 595,000 tons as compared to 1,278,000 tons in December 2016, declining significantly by 53%MoM, while it rose 21% on yearly basis. Specifically, urea sales during January 2017 were recorded at 406,000 tons as compared to 898,000 tons in December 2016, lower by 55% MoM, while it grew 19%YoY. On the contrary, imported urea sales went up to 15,000 tons in January 2017 on account of the discount offering with imported urea prices at 10% discount to its local counterpart. Following the trend, DAP sales also remained depressed, declining to 61,000 tons in January 2017. Post Rabi season, near‐term expectations are: 1) export of excess urea inventory and 2) change in international pricing dynamics.

CPI based inflation for February 2017 is projected at 4.1%YoY, considerably higher than 3.66%YoY registered in January 2017. While food prices are likely to see a dip on seasonal trend, this should be countered by the recent hike in petroleum prices. Consequently, 8MFY17 CPI average is expected to rise stand to 3.9%YoY compared to 2.5%YoY in the corresponding period. Going forward, analysts expect inflation levels to post a steady increase buoyed by higher price levels for food items and rising global oil prices.

Pakistan stock market remains under pressure

The benchmark index of Pakistan Stock Exchange remained volatile during the week owing to political developments related to Panama case. With changing tone of the Supreme Court bench in favor of Prime Minister, the market reversed its earlier losses and closed at 49,365 levels, up 0.31%WoW. Textiles, Autos and Steels were the major driving sectors owing to announcement of textile package, early models launch/robust sales, and imposition of anti‐dumping duty on CRC imports, respectively. As against this, E&Ps and Banks provided major drag on Index due to foreign selling as Privatization Commission approved divestment of OGDC, and expectations of delay in interest rate liftoff, respectively. Average daily traded volumes fell by 20%WoW to 489 million shares where volume rankings continued to be occupied by second tier scrips such as: TELE, FABL, KEL, SSGC and BOP. Volume leaders during the outgoing week included: MTL, SNGP, HCAR, PSMC and ICI, while laggards included: OGDC, ASTL, HBL, UBL and PSO. Key developments during the week included: Prime Minister restored subsidy on fertilizer which was earlier withdrawn by the Ministry of Food, 2) SECP proposed setting requirement all equity funds and funds of funds would have to maintain at least 5% of net assets in cash and cash equivalents, 3) NTC imposed anti‐dumping duty of 13.17%‐19.04% on imports of cold rolled coils/sheets from China and Ukraine for a period of 5 years, 4) Privatization Commission approved initiation of capital market transaction of OGDC’s with divestment of up to 5% stake, and 5) The cut‐off yield declined slightly at the latest Treasury Bills auction with heavy participation of Rs1.071 trillion, while bids valued Rs538 billion were accepted. The market is expected to remain volatile in near term due to political risk associated with ongoing Panama case hearings. Possible selling spree of mutual funds to meet proposed SECP requirement can create additional pressures. Expectations of delay in interest rate liftoff may continue to keep banking sector under pressure. While analysts expect status quo in upcoming Monetary Policy announcement later this month, it can shed further light on interest rate outlook. However, analysts also believe that Textiles, Autos and Steels to remain in limelight due to aforementioned developments. Telecom/IT sector may also garner investors’ interest as the government plans to announce tax relief package for Telecom/IT sector.

With a sharp rise in December'16 (US$1.08 billion), current account deficit in 1HFY17 has accumulated to US$3.58 billion, higher than the deficit recorded for the last fiscal year. The deterioration in 1HFY17 reflects weak trade dynamics (trade deficit up 15.6%YoY) on declining exports and tepid remittances. Going forward, analysts expect the trend to continue with FY17 current account deficit at 1.85% of GDP on account of anticipated increase in imports as crude oil prices stabilize at higher levels and remittances failing to provide support. Concerns also remain on foreign investments as FDI from China has remained lower this year (down 54%YoY in 1HFY17) with the 10%YoY increase in 1HFY17 reflecting US$462 million flows under EFOODS's acquisition. Within this backdrop, analysts highlight mounting risks on foreign exchange reserve with upcoming external repayments (cumulative US$1.5 billion‐ US$1.75 billion under Eurobond, Paris Club and China SAFE debt retirement) largely funded through debt flows.

Lucky Cement (LUCK) is scheduled to announce its 2QFY17 result on 26^th of this month and expected to post consolidated/unconsolidated earnings of Rs4.27 billion/Rs3.48 billion (EPS: Rs13.21/Rs10.78), up 10%YoY/6%YoY from Rs3.87 billion/Rs3.29 billion (EPS: Rs11.97/Rs10.16) for 2QFY16. The growth in earnings is expected to be led by growth in topline owing to 11.3%YoY growth in dispatches as domestic dispatches are expected to go up 23.3%YoY backed by stronger domestic demand and additional sales of clinker to FCCL. However, increase in average coal price by 68%YoY is expected to shrink gross margin (GM) to 43% limiting gross profit growth to +1%YoY. Inter alia, 17%YoY decline in distribution cost due to fall in export dispatches by 28.5%YoY, and 76%YoY higher other income due to higher cash base is expected to result in further earnings growth. Consolidated earnings are expected to get a further boost from operations of 50MW wind farm and 1.18 million tpa cement plant in Congo.

AKD Securities has revisited its investment case for ASTL owing to recent increase in re‐bar prices by Rs3,000/ton. The increase in re‐bar prices is attributable to the rise in imported scrap prices and Chinese re‐bars prices. In this backdrop, ASTL has rallied 44% during January’16 so far, while further increase in domestic re‐bars prices is anticipated. In this regard, analysts estimate Rs1,000/ton increase in re‐bars prices to potentially raise earnings. However, they highlight that the local re‐bars prices are being raised to pass on cost of scrap where US$10/ton increase in scrap price is expected to dampen earnings by Rs0.88/share while it will require Rs1,300/ton increase in re‐bars price to completely pass on this cost. They also believe that ASTL's price rally has been overdone.

Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Engro Fertilizer posts above expectation profit

Engro fertilizer Limited (EFERT) has posted disappointing quarterly financial results; there is no surprise because these are close to analysts’ forecast. The blame for this disappointing performance should go to the Government of Pakistan (GoP) for following bad policies rather than the management of EFERT for any inefficiency.

The Company has posted profit after tax of Rs2,121 million (EPS: Rs1.59) for January-March 2016 quarter (1QFY14) as compared to net profit of Rs3,058 million (EPS: Rs2.30), posting a decline of 31 percent.

If one compares the performance with 4QCY15 the disappointment is even bigger, because the Company had posted Rs5,123 million (EPS: Rs3.89) a hefty decline of 59 percent.

In its report AKD securities has 1QCY16 result above its projected net profit of Rs1.65 billion (EPS: RS1.24) with the deviation in gross margin (more than expected inventory level). It has also attributed 59%QoQ decline in earnings mainly to depressed fertilizer industry dynamics and seasonality.

Key highlights of the result include: 1) Topline coming off by 29%YoY/65%QoQ owing to significantly lower volumetric sales (down 37%YoY/48%QoQ), 2) a 87bpsYoY increase in GP margin from 38.3% in 1QCY15 to 39.2% in 1QCY16 mainly on account of concessionary gas pricing for Enven Plant, 3) a 65%YoY lower other income as a result of 54%YoY reduction in T-Bills and other fixed income placements to Rs10 billion and 4) a 41%YoY decrease in finance cost on account of swift deleveraging.